Peace of mind vs. reality Warranties issued on existing homes are subject of study; No state oversight; Yet 1-year coverage is key marketing tool for real estate agents

THE BALTIMORE SUN

You see them all around town. They hang above or below "for sale" signs, proclaiming that this house comes with a "one-year warranty." Peace of mind for sellers. Peace of mind for buyers.

Well, maybe.

The Maryland Department of Labor, Licensing and Regulation is forming a study group to examine home warranties issued at the time of purchase of an existing home.

Unlike new-home warranties, which must be approved by the department and post a performance bond or letter of credit, companies that offer warranties in resales do not have to file with the state, and the issuers aren't subject to any approval or bonding requirements.

Simply, according to former Maryland Assistant Attorney General Frank Pugh, who will head the group, the state virtually has no power to regulate these companies.

The department also seeks discussion on those warranties that do not cover loss or damage due to "pre-existing" conditions.

"I'm not necessarily on a crusade to stomp this thing out," Pugh said. "But now people feel that they have been abused. They relied on something, and it turned out it wasn't [what it seemed to be]."

In Maryland, Homeowners Marketing Services Inc., based in Sunrise, Fla., is the primary issuer of one-year home warranties.

According to its president, Alan N. Pyles, its market share is 85 percent in the mid-Atlantic region -- Maryland, Delaware, the District of Columbia, Virginia and West Virginia.

In Maryland alone, he said, about 25,000 warranties were issued in 1996. In fact, HMS is the sole choice for O'Conor, Piper & Flynn and is in the process of becoming the same for Prudential Carruthers Realtors.

"I've raised the question with different groups, first of all, if this is legal," Pugh said.

"There isn't any authorizing statute, and in legal theory it dTC amounts to insurance. Insurance is where you don't control the risk. [You] spread the risk among the people [and] pay a fee sometimes called a premium.

"The more you can control the risk, the less legally it constitutes insurance. That's case law.

"Since you can't control the risk and are spreading it among the people, that's why it's important for government regulation to step in and make sure that the person selling this insurance has adequate financial resources to pay claims."

Among the mid-Atlantic states, only Virginia has regulations that affect companies such as HMS and American Home Shield, another company that offers home warranty protection and along with HMS is offered by Coldwell Banker Grempler Realty and Long & Foster.

Pyles said HMS -- which operates in every state -- is regulated in Florida and, even though it doesn't have to be registered in Maryland, files a financial statement with the insurance commission.

"It's not an insurance, but it looks and smells much like one," Pyles said. "We've always been able to fulfill whatever requirements Maryland has needed by being able to show them what we have in Florida."

A one-year home warranty has become a highly successful marketing tool used by agents in selling houses. According to the National Home Warranty Association, warranted homes sell up to 50 percent faster than unwarranted homes.

A seller can purchase a warranty during the listing period and, as an enticement, also purchase one for the buyer.

A limited warranty

The warranties are limited to covering the home's operating systems and appliances, not its structural features.

The cost for a "Buyer's Warranty Plan" is $355, and for $40 more the heating and air-conditioning units also will be covered. Other options include covering swimming pools or a whirlpool tub.

If a system fails, then the seller, during the listing period, or the buyer, after settlement, must contact HMS, which will send out one of its approved contractors. Each claim carries a $100 deductible.

HMS has been operating in Maryland since 1984 and has a solid reputation among Realtors for servicing claims.

"I will not sell a house that does not have a home owner's warranty," said Billie Landbeck, the chairman of the Maryland Real Estate Commission and a veteran Realtor with O'Conor, Piper and Flynn.

"I think they [HMS] do good work," she added, saying that she would discuss the issue with other commission members.

In 1996, according to the company, there were 1.6 claims reported per contract, with the average payout $211 to the holder of the warranty.

However, each contract states that "coverage does not provide for service related to any pre-existing condition." And it's that phrase that causes concern for Pugh.

Reasonable assumption

"Right now they [consumers] get this thing, this one-year warranty. And they think that it's some kind of guarantee that nothing is going to go wrong, and that's a reasonable conclusion or assumption for buyers to come to," Pugh said.

"And they place that as one of the factors that they rely on in making a decision to buy this house over that house. So they can be misled.

"So I would like them to either take this language out -- which they aren't going to -- or couple it with an inspection that says 'other than the defects listed on the inspection attached, we'll cover everything for a year.' I can certainly live with that," Pugh said.

Pyles said HMS last year denied only 1.1 percent of its claims nationally because of "pre-existing" conditions.

"The program's not flawless," Pyles said. "And I can mention the opposite extreme that we see way too often, where something is already broken and the consumer either does or is told to ignore it, buy the warranty and submit a claim.

"I would say we verify that happens more than the pre-existing one does. But what we have to look at is overall satisfying and serving the consumer.

"We pay millions of dollars a year in Maryland for things that are covered."

Trouble after settlement

Much of the confusion comes after a home inspection -- which is usually required in a contract of sale -- gives a house a clean bill of health. Then, after settlement, something goes wrong.

HMS is called, a contractor is sent and a determination is made if the failure was caused by a "pre-existing" condition. That's a scenario that happened to Jean Thompson, an agent with O'Conor, Piper & Flynn.

"I have had an instance where we had done the home inspection. The home inspection had shown that the furnace was operating properly. [The buyers] moved in in September. In October, it got cold enough to turn the heat on and it wouldn't work," Thompson said.

"They called the warranty company. They sent someone out. They repaired it. The next day it didn't work again. They came out again and then they said, 'The furnace was really outdated and it needs to be replaced.'

"They said, 'Well, it's under warranty. Are you going to replace it?' [The contractor said], 'Oh, no, it's a pre-existing condition.'

"Needless to say, they were quite unhappy. They called me and I stepped in at that point because the company said they weren't going to pay for it.

"I called the person who is our sales representative, and I wasn't going to let them off the hook and they did replace it. But I had to intervene. I was there at the home inspection. I sold the house and there was no reason why the people had to pay for this when they bought it with the understanding that there was a warranty," Thompson said.

The suggestion that HMS send out its own inspector when a warranty is purchased -- as Pugh suggests -- may be financially impractical according to Pyles.

"So now we're going to have to add a cost to the warranty 100 percent of the time to address the 1.1 percent where there is a problem. I think we would get the other 98 percent complaining why are they paying more," Pyles said.

However, Pyles agrees with Pugh that in reality what they are selling is a limited warranty and that real estate agents must make it clear to buyers and sellers what is covered and what is not.

"It's marked all over that it's a limited warranty, and I think everybody would be well-served to reverse the way it goes, that for $300 or $400 this is what you do have coverage on," Pyles said.

"It's by all means not one that says for $300 to $400 anything that goes wrong in your first year, you're covered. That's when we have problems and that's when we have a perception problem."

And that's what Pugh ultimately wants to solve.

"There are degrees of being satisfied," Pugh said. "I would be a little happier if, instead of the big sign that says, 'Warranty,' if the big sign said, 'Limited Warranty'. You have to put people on notice. Now that doesn't move a house, but it does give a little bit better disclosure.

"My first choice is that if they are going to do this stuff, then it be related to an inspection -- the regular inspection, their own inspection and a list made of what is not covered.

"I'm open to suggestions. I'm just going to try and gather some information and pass it along and see if some people in authority will do something."

Pub Date: 7/06/97

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